Time to take your pawnbroking profits

Who does well in a downturn? One recession play we’ve mentioned several times in the past is to buy shares in pawnbrokers.

Pawnbrokers offer a quick way of raising cash in a hurry when the bank manager isn’t playing ball, or if your credit card is running out of rope.

The idea is that you take in, say, a valuable watch. The pawnbroker will lend you about half its estimated value, and will charge you interest at around 8% a month. You pay nothing until the loan comes up for repayment – usually six months tops – then you either pay what you owe, or the pawnbroker keeps your watch.

It’s a very profitable business, as Albemarle and Bond (LSE: ABM) confirmed this week. Turnover rose almost 50% in the six months to 3 December – pre-Christmas is always a good time for the industry – while pre-tax profits soared 75%. Meanwhile, the dividend is up 22%.

In addition, City analysts see profits for the year ending June 2010 hitting a record £18m. And the company is planning to double its number of outlets in the next five years. What’s more, it’s found another way of cashing in on the recession: setting up temporary shops using short-term lets in empty retail units. Smart.

So surely it’s worth staying on board as an investor?

I’m not so sure. The shares have risen 40% since our tip a year ago. At 274p, on a p/e of 12 for the current year, which analysts see dropping only slightly for the following 12 months, Albemarle isn’t as cheap as it was. And the yield is now only 3.5%.

Yes, the company should keep making more money – we don’t think the economy looks too healthy. But much of that future progress now seems to be factored into the share price. What’s more, as John Stepek explained on Monday, we reckon the stock market rally could soon run out of cash as well.

Given the balance of risks, I’d suggest taking your profits.